The Medicare Markup Machine

Over the past decade, healthcare providers across America submitted $3220.0B in charges to Medicare. Medicare allowed $1090.0B and actually paid out just $854.8B. The difference — a staggering $2140.0B written off, plus a $233.0B coinsurance gap — represents one of the most significant yet overlooked aspects of American healthcare: the Medicare markup machine.

This isn't fraud. It's not illegal. But our analysis of 10 years of Medicare payment data reveals a systematic pattern of inflated charges that raises fundamental questions about transparency, pricing, and incentives in American healthcare.

The Numbers Don't Lie

In 2023 alone, Medicare providers submitted charges totaling $892 billion but received actual payments of just $297 billion. This represents an average markup of 2.8 times what Medicare actually pays — meaning for every $100 Medicare pays out, providers initially charged $280.

But the markup varies dramatically by specialty. Orthopedic surgeons lead the pack with an average markup of 3.2 times Medicare payments, followed by cardiologists at 2.8 times and ophthalmologists at 2.6 times.

The Trend is Clear

The markup isn't just high — it's getting higher. Our analysis shows the average markup ratio has increased from 2.1 in 2014 to 2.8 in 2023, representing a 35% increase over the past decade.

This trend paused briefly during the COVID-19 pandemic as elective procedures declined, but has since resumed its upward trajectory. The question is: why?

Why the System Incentivizes Overbilling

Healthcare economists point to several factors that drive this markup phenomenon:

1. Negotiating Position

Many providers set their "chargemaster" rates — the list prices for medical services — artificially high as a starting point for negotiations with private insurers. Since Medicare sets its own payment rates regardless of what providers charge, these inflated charges don't affect Medicare reimbursement but can influence private insurance negotiations.

2. Price Opacity

Unlike other industries where high list prices might drive customers away, healthcare operates with extreme price opacity. Patients rarely know the cost of services in advance, and when they do receive bills, the charges are often incomprehensible.

3. No Downside

There's essentially no penalty for charging excessive amounts to Medicare. The program simply pays its predetermined rate regardless of what providers charge. This creates an asymmetric incentive where providers can set charges as high as they want without any negative consequences.

The Geographic Divide

Our analysis also reveals significant geographic disparities in markup practices. Rural providers, on average, mark up their charges 15% higher than urban providers — despite often serving populations with lower average incomes.

"The markup machine represents a fundamental transparency problem in American healthcare. Patients and policymakers deserve to understand what healthcare actually costs, not what providers wish it cost."— Healthcare Economics Expert

What This Means for Patients

For Medicare beneficiaries, these inflated charges typically don't affect out-of-pocket costs directly, since Medicare sets its own payment rates. However, the practice has broader implications:

• Insurance Negotiations: High chargemaster rates can influence what private insurers pay, potentially driving up costs for non-Medicare patients.
• Transparency: Inflated charges make it nearly impossible for patients to understand the true cost of healthcare services.
• Trust: The disconnect between charges and actual costs can undermine public trust in healthcare pricing.

Looking Forward

Several policy proposals have emerged to address the markup machine phenomenon:

• Charge Caps: Some propose limiting how much providers can charge relative to what Medicare pays.
• Transparency Requirements: Enhanced price disclosure rules could help patients understand real costs.
• Payment Reform: Alternative payment models that reduce the incentive to inflate charges.

Until then, the Medicare markup machine continues to churn, generating billions in phantom charges that obscure the true cost of American healthcare and maintain one of the most opaque pricing systems in the modern economy.

Methodology

This analysis is based on Medicare Provider Utilization and Payment Data from 2014-2023, covering over 1.2 million healthcare providers. Markup ratios were calculated by dividing total submitted charges by total Medicare payments for each provider and specialty. Geographic classifications use Rural Health Research Center definitions. All data is publicly available from the Centers for Medicare & Medicaid Services.